In today's business and political environment, executive compensation is under scrutiny. This is an issue that impacts primarily public companies, but even private organizations may find themselves defending their approach to upper tier compensation, especially that of the CEO. If that happens to you, what will your response be?
The leaders of most organizations look for some means of validating their approach to the type of incentive plan they put in place--or whether to even have a value-sharing arrangement at all For such chief executives and others with responsibility for variable pay plans, data is a useful tool. It can, however, also be a dangerous one. The value of data is that it gives a picture of what the market is doing; how others are addressing key compensation issues with which most businesses grapple. The danger comes when organizations put too much weight on what the data indicates and then simply try to mirror what others are doing.
Let's deal with each of these issues one at a time.
Most leaders of growth-oriented companies have large ambition. They are not looking for incremental change. They are seeking breakthrough results. If you sit in meetings with these CEOs, you won’t hear things like: “Well, let’s look closely at our competition and see if we can mirror what they are doing, but maybe just a little better.” The idea is laughable. Instead they communicate and demonstrate an insatiable curiosity about what’s possible and where they want to take the company in the future.
June 12, 2015
Many, if not most, organizations have some kind of annual incentive plan. Unfortunately, a majority of them are not happy with it. Often, our phone rings when an organization can't take it anymore and wants help with its plan. When it does, we typically hear one or more of the following complaints:
- "Our bonus plan has become an entitlement--people just expect it."
- "Our incentive program isn't structured properly--we're paying out benefits when we aren't even profitable."
- "Our plan is completely discretionary. I go into the closet at the end of the year and try to determine how much of our profit to share, who should get a payout and how much they should receive. There's got to be a better way."
- "Our short-term incentive plan has become too complicated. We have too many metrics and people are confused."
- "Our employees don't understand what they need to do to maximize the payout from their plan--and then they complain about how much they get."
There's more, but you get the picture. The issues these business leaders articulate are symptomatic of three common mistakes companies make with their annual incentive plans:
Much has been written about incentive plans in business and whether they really make a difference. Critics argue that money is not a motivator and that you can't pay people to perform. Fair enough. I don't argue with either of those assumptions. However, people who are working hard to create value for the business instinctively know there should be some means of sharing in the growth they help fuel. They seek a sense of partnership with company owners and won't become full stewards of the their vision unless their role is codified financially. Similarly, shareholders want business partners, not just employees. They expect performance and productivity and feel incentive pay can be used as a strategic tool towards that end...if applied properly.
Most business leaders don't object to paying incentives. What they struggle with is what kind of results they should reward, who should receive them, how they (the incentives) will be "paid for" and what the right balance is between short and long-term value-sharing. These are difficult issues and create a lot of pain for those trying to make effective decisions in this regard.
Last week I talked about why deferred compensation (DC) is still a viable plan for the right organizations. Some of those companies are interested in a plan that serves as more than a means for employees to defer income and save taxes. They want it to have a performance component associated with it. So this week, I'll discuss how to turn a plan into a means of creating greater focus on the results the company wants its top performers to achieve.
Over the years, deferred compensation plans have experienced varying degrees of popularity in corporate America. They rose to prominence in the 70s with many major companies providing some form of this benefit to their executives. As companies started moving away from defined benefit and defined contribution plans and towards 401(k) plans in the 90s, deferral plan arrangements became a solution to offset the "reverse discrimination" those plans imposed against highly compensated executives. Then we hit the 2000s when Enron prompted 409A--and many organizations wondered if deferred compensation would even survive.
So where are we now? Is such a plan still a viable pay strategy to employ? If so, how do you determine if your business should have one?
Much has been said in recent years about the disparity of earnings between those who lead organizations and those employed by them. The underlying theme is unfairness and the premise is that CEO compensation exceeds that of rank and file employees in a disproportionate way relative to the value each bring to their organizations. Few meaningful remedies are ever offered. For the most part, the subject simply makes for entertaining political conversation. That discussion will surely rachet up a few notches during the upcoming election season, so fasten your seat belt. (Sigh!)
A common concern of business leaders about making increases in compensation is affordability. This is especially true of incentive plans. The assumption is that "costs" will go up if an annual bonus or some type of long-term program such as phantom stock or a profit pool is added--and there's no room in the budget for that kind of increase. It's not an unreasonable response. However, it's rooted in an incorrect premise. Let's look at it from a more enlightened perspective.
If you lead an ambitious private company, you likely struggle with some part of your pay strategy. Maybe you're comfortable with your salary structure, but your annual bonus is ineffective. Or perhaps you've delegated the formation of your compensation approach to human resources--and are not feeling like it's headed in the right direction. It could be you feel your overall pay structure is solid enough but it's not helping you attract the kind of talent you're trying bring in.
In short, you don't feel there's alignment between compensation and the business model and strategy of the company. As a result, you're feeling some pain.
A common lament of business leaders is that their people don't "get" what's most important. They want their people to think and perform like a business partner but they seldom find them engaged on that level. There seems to be a consistent disconnect and the constant preaching about priorities and targets falls on deaf ears. To make matters worse, many employees act entitled and seem frustrated they aren't earning more--or that this year's bonus is no bigger than last. It's enough to make an owner scream. (If it will make you feel better, go ahead and let one out right now!)
April 02, 2015
I don't think Shakespeare ever ran a business, but if he did, that likely would have been the question; not the infamous one he posed.
If you're a business owner or CEO who has tried to recruit a key producer--or hold on to the premier talent you have--you've inevitably been asked this question: "Can I have equity in the company?" When faced with that query, you have probably struggled with how to respond. You don't mind giving away stock if it means a bigger "pie" will be created but you worry about the immediate impact of diluting the present shareholer value. And what if a bigger "pie" doesn't materialize?
Business leaders want their people to perform. They know this needs to happen for the company to grow.
I don't know anyone who would argue with that. Despite that truth, many CEOs still struggle with whether or not the way they pay their people will have any bearing on the results they achieve. When a discussion arises about whether to add a long-term value-sharing plan or expand the scope of who participates in the annual bonus, paralysis sets in. They get stuck on this basic question: "Will it matter?" The concept of pay for performance is called into question primarily because they've "tried" things in the past and they haven't seemed to work.
March 12, 2015
If I'm a business owner, I need my employees to draw the same conclusion I do about "what's important." And I want them to behave in a way that reflects that understanding and commitment. Would you agree?
Stewardship of results, however, does not just occur because employees come to understand better what company ownership wants to achieve. This is an assumption too many business leaders make. "I have told my employees about my vision and what I expect of them, so why are they not more focused? Why am I not seeing the results I anticipated?" Why indeed? Let's explore the reasons.